All The Rage

The current debate about the state of Barbados' international reserves is not just about statistical measures, but about the nation's ability to pay its way with foreign exchange. The latest salvo that I saw in the press was yesterday's piece in the Nation, with Albert Brandford trying to explain the two common measures cited--gross or net official international reserves (see report)--taking his cue from Clyde Mascoll's muscular arguments during the past week about how the central bank has moved the analytical goal posts in its latest economic review. I am not going to get into a bicep flexing contest about who knows more about these measures--I do know a bit, having worked on developing the methodology for measuring the concepts (take a look at the IMF's Monetary and Financial Statistics Manual, or the associated Compilation Guide) and also having worked on seeing how they are applied in many operational contexts.

The bottom line with any measure of international reserves is how much money does a country's central bank actually have available to meet the country's external financial needs. In some instances, we can stretch the official hand so that it has access to (gross or net) foreign assets held by commercial banks to help bolster the situation. But that is largely private money that is held for commercial operational needs.

Whether you take the current level of gross or net official international reserves, Barbados is seeing the level fall. Moreover, the activities that would help turn that situation around--mainly money coming from tourism--is clearly waning. The things that have to be paid for are not reducing fast enough, hence reserves are falling.

But, are they at a critical level, or approaching that, on any measure? As I cannot see all the cash flow needs that are facing the government and central bank, I cannot say for sure. But, what I do know is that some large needs are there and they will have to be covered in part, or in whole, by borrowing more foreign assets. The conditions for such borrowing are not good, and the sense given by international rating agencies is that they see Barbados as less worthy of being upgraded in their eyes, and more worthy of being downgraded. So, the question that arises is "Will Barbados have friends when it is in need?". If reserves are falling but you cannot borrow commercially (on acceptable terms) then you are in a bind. Something else will have to give in your policies or to whom you have to turn. You can argue about the when and the what and the how, but it has to happen. As an economist, I cannot take it for granted that most people understand this, but I am sure that policy makers do. So, what will they do to either explain that truth or start to deal with it? Lamaze breathing is not going to be enough to deal with the pain.